US Stocks Remain Lower; DJIA Down 255 Points

PeterA. McKay

Turmoil in the auto industry and continued worry about the financial sector hammered the U.s. stock market on Monday, further eroding the market's upswing of recent weeks.

Over the weekend the Obama administration forced out the chief executive of General Motors and said that the best chance for success for the struggling auto maker and Chrysler may be bankruptcy. Treasury Secretary Timothy Geithner meanwhile signaled some banks are still ailing and will need further aid from the government.

Strategist Bill King, of M. Ramsey King Securities in Burr Ridge, Ill., said investors are skeptical that the government can engineer a turnaround for the car makers. "These guys have no experience running factories and getting their fingernails dirty," said King. "But at the same time, you have them running bigger and bigger chunks of the economy."

Geithner said Sunday on the ABC News program "This Week" that "some banks are going to need some large amounts of assistance." Some traders said Geithner was tipping his hand on banking "stress tests" with that comment.

Joseph Battipaglia, equity strategist at the private client group of Stifel Nicolaus, said that the stress tests were likely to show that banks are too thinly capitalized.

"For a while, banks were thinking they'll earn their way out of this problem," but the weakening job market is hurting consumers' ability to repay loans and their appetite for more debt, limiting banks' profitability, Mr. Battipaglia said. He also expects corporate and commercial real-estate loans to cause more pain for banks.

Anthony Conroy, head trader at BNY ConvergEx, a New York brokerage, said that some traders are wondering whether troubled banks may also be subject to personnel decisions dictated by the government.

He added that it seems that an unwinding of bearish bets that fueled gains earlier in the month seems to have dried up for now. "As long as you had shorts out there waiting to cover, it helped to put a bit of a floor under the market," he said. "Now, a lot of them have taken their profits and gotten to the sidelines."

The Nasdaq Composite Index declined 3% as technology stocks joined in the broad market selloff. Industrial and energy stocks also sank.

The selling followed a weeks-long rally in which markets had rebounded on hopes that the economy may be beginning to moderate. The Dow industrials climbed 19% above the bear-market lows of early March and notched a third straight week of gains last week.

Some investors had cautioned that the gains could be fleeting. Companies will start reporting first-quarter results in the coming weeks and many are bracing for bad news. Last week, some banking executives said that after a strong start to the year, March had been more difficult.

"We simply do not believe that the market has completely priced in the prospect of further earnings weakness or that it will, without interruption, look through this weakness to recovery," Morgan Stanley strategist Jason Todd wrote in a note to clients.

Investors are also looking ahead to the outcome of this week's G20 summit and a report on U.S. employment during March due for release Friday. Accounting overseers are also expected to issue new guidance on mark-to-market rules this week.

The renewed anxiety in equity markets Monday pushed many investors into bonds. The 10-year Treasury note rose 6/32, pushing its yield down to 2.74%. Bonds were off their best levels of the day. In currency markets, the dollar slid against the yen and gained against the euro. Gold declined and oil futures sank below $50 a barrel.

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